Wednesday, October 31, 2012

The FCC is now preparing
what it calls a "comprehensive data collection order" in an effort to
establish a new regulatory framework for special access services. New
regulations apparently would replace the modest deregulatory approach that the
FCC dumped in August.

The FCC's special access
data collection endeavor presents a set of complex and compounding problems
that, as much as anything else, serve to illustrate the misguided nature of the
agency's re-regulation bent. Fights are already brewing over what data should
be collected. And disputes are also taking place over how to define the data
that should be considered relevant in the first place.

There's plenty of reason to
be concerned by the new re-regulatory FCC's special access policy. The agency
dropped pricing flexibility triggers even while admitting it lacked the
necessary data for a comprehensive analysis of the market – hence the pending
data collection order. And once it has collected the data, the FCC hinted it
will analyze it under a decidedly pro-regulatory
framework like the one it adopted in its 2010 Qwest Phoenix MSA Order. So, the likely result would be a significantly
re-regulated market for special access services.

Special access services
employ dedicated facilities running directly between the end user and the physical
point where an interexchange carrier connects its network with a local network.
(By contrast, switched access services use local exchange switches to route
originating and terminating interstate traffic.) Competitive carriers,
including those offering services to enterprise businesses, often rely on
special access lines to reach customers. And large businesses also directly
purchase special access services to meet their needs.

Starting in 1999 the FCC
permitted incumbent local exchange carriers (ILECs) offering special access
services to receive pricing flexibility. Under what the FCC termed a
"market-based approach," the FCC established a pair of
"competitive triggers" based on the extent that competitors had
collocated facilities in ILEC's wire centers within a particular metropolitan
statistical area (MSA). Where the lower competitive collocation trigger was
met, ILECs were permitted to offer services at discounts off the capped prices.
And where the higher trigger was met, ILECs could offer services outside of
price cap regulation but subject to tariffs. Through the FCC's Enterprise
Broadband Orders, ILECs have also
been granted forbearance relief from special access regulation for enterprise
broadband services such as Ethernet.

FCC put a sudden stop to its
modest deregulatory approach in its August Special Access Order. The FCC suspended the automatic pricing flexibility
triggers for special access services. The agency preemptively took this action –
that is, it changed policies even while expressly acknowledging the lack of data concerning special access services.

For instance, the Special
Access Order gave nods to claims by
various parties about the supposed lack of competitiveness in the market. Such
claims appear to have helped prompt the order, at least in part. This despite
the FCC's admission it "cannot yet evaluate these claims of competitive
harm based on the evidence to date in the record." The FCC said a
"comprehensive evaluation of competition in the market for special access
services is necessary." But then the agency insisted it lacked the
necessary data for such an analysis. By the same token the FCC admitted: "…we
currently lack the necessary data to identify a permanent reliable replacement
approach to measure the presence of competition for special access
services."

So
the Special Access Order
concluded: "[I]n the absence at this time of clear evidence to establish
reasonable and reliable proxies to determine where regulatory relief is
appropriate, we will collect necessary data and undertake a robust competition
analysis that may identify reliable proxies for competition in the market for
special access services going forward. We will issue a comprehensive data
collection order within 60 days to facilitate this market analysis."
Release of the FCC's comprehensive data collection order apparently is now
imminent.

That
the FCC changed policy regarding special access services without the data
necessary for a robust competition analysis is dubious in its own right. But it
is evident that there are other reasons why the FCC's forthcoming data
collection order is not likely to inspire confidence. And they have as much to
do with the increasingly competitive nature of the marketplace as anything
else.

Deciding
what data should be collected poses serious dilemmas, especially in markets
that are changing and technologically dynamic. For example, in order to
determine whether specific geographic areas are competitive or not, the FCC
will likely need to collect data on the number and location of existing
facilities. But requiring disclosure of such information imposes significant
compliance costs on providers. Some smaller providers have argued they should
receive de minimis exemptions
from any such disclosure requirements. But this would mean ignoring real existing
facilities and their competitive effects. And, not surprisingly, providers may
be reluctant to disclose such information because they consider it to be
commercially sensitive.

Pricing
information regarding special access services also presents problems for the
FCC. In ex parte filings with the
FCC, competing providers have indicated they also consider pricing data to be
commercially sensitive. ILECs often enter into commercial arrangements with
carriers or business enterprises at discounted prices. Nonetheless, providers,
again, not surprisingly, have suggested they would rather not disclose data
regarding price offerings or privately negotiated arrangements.

Similarly,
the kind of forward-looking analysis that the FCC insists it will undertake
will require information not only about existing competition but also about
sources of potential competition. However, providers, still not surprisingly,
have indicated reluctance to divulge their strategic plans for future
deployment.

Presumably,
the FCC must also define the kinds of services, facilities, and business
practices that are relevant or otherwise within the scope of its data
collection order. In particular,
any serious data collection order would need to include – and therefore to define
– those kinds of services that are reasonably close substitutes to special
access services. As I blogged about previously, broadband enterprise services
relying on Ethernet technology offer an alternative for handling wireless
backhaul traffic and for meeting the needs of large businesses. Of course, some
competitors have already complained that Ethernet and other broadband
enterprise services aren't adequate substitutes.

Disputes
already have arisen in ex parte
filings over what competitor facilities should be counted in any competitive
analysis. That is, the FCC will have to settle whether its data collection and
analysis should include facilities where competing providers possess
"indefeasible rights of use" (IRUs) through lease agreements. This
includes settling on a minimum term of years for recognizing such IRUs, whether
5, 10, or even 20 years time.

As
I have written about on prioroccasions,
the framework adopted in the Qwest Phoenix MSA Order disregards close substitutes, such as wireless. And
it makes evidence of price reductions in large networks with substantial up-front
fixed costs and subject to extensive regulations a pre-requisite to any
regulatory relief. For such reasons, that framework poses a near insurmountable
barrier to obtaining regulatory forbearance relief. Extending that kind of
framework to the special access market would likely result in a highly
re-regulated special access market. This despite the prevalence of competitive
and potentially competitive alternatives posed by enterprise broadband services
and other alternatives.

Resolving
the data collection and definitional dilemmas that confront the FCC will be no
easy task. This is not so much because there are not a lot of capable people at
the agency. Instead, it is because, in essence, the FCC has now taken upon
itself the task of trying to assemble the type of market data that would be
required in an old-fashioned analog-era rate case in a competitive era not
suited to old fashioned rate case data production.

As it now stands, the brouhahas surrounding the
agency's attempt to delineate the parameters of its information collection
effort are simply foreshadowing the big mess the FCC's new pro-regulatory
policy almost certainly will create.